Japan's banks brace for counterparty risks

June 30, 2016

Taro Fuse, Taiga Uranaka and Kenneth Maxwell, Reuters

Japan's banks are bracing for a potential rise in British peers' counterparty risks after Britain voted to leave the European Union, banking industry sources said, with the departure reportedly set to trigger a downgrade in the country's top-notch credit rating.

Banks engaged in derivatives and other trades are exposed to risks of counterparties failing to meet contractual obligations, risks that grow if the counterparties' ratings are cut in moves that increase borrowing costs.

Ratings agency Standard and Poor's said Britain's "AAA" sovereign credit rating is "untenable" after the result of Thursday's referendum, the Financial Times reported on Friday, citing Moritz Kraemer, chief ratings officer for S&P. A sovereign downgrade is usually accompanied by cuts in ratings at that country's banks.

The S&P comment came as ratings agency peer Fitch said it will review Britain's sovereign rating shortly, and that the country's status as a major banking hub could be damaged as some business lines shift to the E.U." Read more